AP Survey: China Slowdown to Bruise Global Economy

2 Nov 2014

WASHINGTON (AP) — China’s roaring economy for years has pulled much of the rest of the world with it, soaking up oil, iron ore and other commodities from developing countries and autos and luxury goods from Europe.

But its role as a global engine is fading as its economy slows — and many other nations, in the view of economists, will feel the pain. An Associated Press survey of 30 economists has found that 57 percent of them expect China’s decelerating economy to restrain growth in countries from Brazil and Chile to Australia and South Korea.

A notable exception is the United States, which the economists see as largely insulated from China’s troubles.

China’s once-explosive growth has slowed in part because of its government’s efforts to restrain its speculative real estate sector and shift its economy toward consumer spending. China’s economy expanded 7.3 percent in the third quarter from a year earlier, its slowest pace since 2009. A growth rate above 7 percent would be the envy of most major economies. But for China, it marked a sharp slowdown after three decades of double-digit expansion.

Last week, the Conference Board, a business group, forecast that China’s growth would slump to 4 percent by 2020.

China’s deceleration is rippling around the world. Brazil and Australia are selling it less iron ore, a key ingredient in steel, as China’s construction boom slows. Chile is exporting less copper to China. Indonesia is selling it less oil and lumber.

China is also cracking down on corruption, which threatens European designer brands. Sung Won Sohn, an economist at California State University’s Smith School of Business, estimates that one-third of luxury Swiss watches are exported to China. In addition, China is the fastest-growing market for Mercedes-Benz and BMW.

U.S. automakers, particularly General Motors, also sell lots of cars in China. But nearly all are built in China and don’t contribute much to the U.S. economy, Sohn said. That’s true of many other U.S. goods sold in China, including electronics. As a result, weaker sales in China wouldn’t much hurt the United States. Capital Economics, a forecasting firm, calculates that only 6.5 percent of U.S. exports go to China — equal to just 0.9 percent of the U.S. economy.

“It’s hard to see a slowdown in China having a really significant impact on the U.S. economy, barring a complete collapse,” said Paul Ashworth, an economist at Capital Economics.

The AP surveyed a range of corporate, Wall Street and academic economists from Oct. 24 through 29. Among their other views:

— If Republicans wrest control of the Senate from Democrats in Tuesday’s elections, it would probably cause political gridlock but would have little effect on the U.S. economy. A few economists said such an election result might lead to tax reforms that would boost long-term growth.

— Retail sales will pick up during this holiday shopping season. The economists think sales will rise 4.1 percent from a year ago, up from 3.8 percent in 2013. Lower gas prices and greater hiring should boost Americans’ spending power.

— Federal Reserve Chair Janet Yellen has done a better job than her counterpart at the European Central Bank, President Mario Draghi. The economists gave Yellen an average score of 3.8 on a scale of 1 to 5, with 5 the best and 1 the worst. Draghi earned 3.2. Most economists say they wish the ECB would take bolder steps to spur growth in the 18-nation eurozone, which may be on the brink of its third recession in seven years.

Most of surveyed economists think the U.S. economy can expand at a respectable annual rate of 2.5 percent to 3 percent through next year even if Europe, Japan and China stumble.

On Friday, Japan’s central bank unexpectedly intensified its stimulus efforts to try to invigorate its chronically anemic economy. The Bank of Japan will buy more government bonds and other assets lift inflation and spur more spending. That announcement helped lift financial markets around the world.

Oil prices have fallen more than 25 percent since summer, partly because China is using less of it and thereby reducing global demand for oil. With demand slowing, the national average price of gasoline in the United States fell 33 cents in October to $3.00 even, according to AAA. The average dipped below $3 this weekend for the first time in four years.

Robert Johnson, an economist at Morningstar, an investing service, noted that the United States has been recovering steadily from the Great Recession even as China’s economy has weakened. China was growing at a double-digit pace in 2010, when the U.S. was still struggling to escape the recession. Now, the U.S. economy has expanded at a 4 percent annual pace over the past six months.

Still, if China’s growth does slow significantly, eventually it could diminish growth in the United States.

“China is such a big market,” Sohn said. “Sooner or later, we will feel the impact.”